Thursday, October 18, 2012

Don't Innovate, Imitate

By Jonathan Moules

Imitation is not just the sincerest form of flattery. It is one of the shrewdest ways to become a successful entrepreneur.

Entrepreneurs are often mistaken for inventors. They are not.
There are some very entrepreneurial inventors, but they are an
exception. Most entrepreneurs take another person's technological
breakthrough and use their skills in mobilizing resources, publicity,
salesmanship, and financial management to create a viable business.

Inventors create the technology, but entrepreneurs turn it into
something of economic value. It is possible to go a stage further than
this, however, because people do not just invent things, such as cars or
personal computers, they come up with ideas for new services that
people need and ways of providing them.

Many successful entrepreneurs have built great businesses by doing
what someone else has done, only better. This demonstrates that
originality in entrepreneurship is actually an over-rated virtue.
Imitation, on the other hand, is not just the sincerest form of
flattery. It is one of the shrewdest ways to become a successful rebel
entrepreneur.

Take Lovefilm,
the highly successful UK-based startup that has made renting DVD films
and television box sets across Europe as easy as going to the post box
or getting online. In January 2011, barely 12 years after it was
founded, the company had over 1,500,000 members, each paying a monthly
subscription of about £8, a catalogue of over 67,000 film and television
program titles, and over 4 million rentals per month across five
countries.

The premise of Lovefilm's business model is simple. Customers pay a
monthly fee to receive a number of DVDs or games discs in the post, or
the right to download a given quantity over the Internet to a TV or
tablet device. They can play the games and watch the films as much as
they like, and keep them as long as they like, but they will not get a
new one until they return the ones they already have. Lovefilm is able
to do this because in most western European countries there are two very
reliable delivery mechanisms--one very modern (the Internet) and the
other Victorian (the postal service).
Lovefilm's customers pay a subscription to the company, log onto the
website and set up lists of favorite films or games, which are ranked as
high, medium or low priority. Lovefilm then picks one or two of these,
depending on the customer's price plan, and according to availability in
the warehouse, and pops them in the mail. Both the old and the new
technology work.
Since its creation, Lovefilm has developed its offering to allow
customers to bypass the old-economy postal system entirely by streaming
video over the Internet to get films 'on demand' on their home computer,
games console, TV, tablet computer or smartphone.
Pretty neat, huh? Yes, except Lovefilm is completely unoriginal.

Reed Hastings pioneered the idea of DVD rental by post in California
back in 1997, allegedly after his shock at receiving a bill for $40 in
late fees from Blockbuster. Hastings had to fine-tune his original idea
to make it work. Initially the business model for his company, Netflix,
was for customers to pay for each rental individually. In September
1999, he changed this and Netflix started offering monthly
subscriptions. The pay-per-rental model was dropped completely a few
months later.
It was not for another three years that Lovefilm began trading in
Europe. There were advantages to this. By that time, people had been
able to see that the idea worked, helping Lovefilm's founders to put
their case when they needed backing from investors or to recruit key
personnel.

Amazon bought Lovefilm in 2011, making multimillionaires of its
investors. This brought the links with Netflix full circle, given that
Lovefilm is now part of a U.S. company.
Amazon had seen the potential of the online DVD rental market at
first hand with Netflix. Its founder, Jeff Bezos, has a reputation for
constantly trying to stretch the Amazon brand into new areas. His
approach has often been to try things himself before buying one of the
best players in the market--another way of grabbing someone else's good
idea. This is exactly what he did with the online DVD rental model.
Amazon tried building its own video rental service, based on people
downloading titles from its website. This was not as successful as Mr.
Bezos would have liked, so he bought Lovefilm instead.
Imitator brands have clearly been a benefit for Amazon. In a way they
have acted as the research and development function of Amazon, honing
the service until it was ready for Amazon to acquire.

First movers do not necessarily have the advantage

One lesson from Netflix and Lovefilm is that a business model is very
hard to control in a world of free trade and the free flow of ideas,
even with patent protection.
Another lesson from this story is that the first to market is never
guaranteed first place. That prize goes to the entrepreneur who can
out-execute his or her rivals.
Sometimes it can be the innovators' own fault that they fall behind.
In 2011, while Lovefilm expanded across Europe and positioned itself to
launch in the United States, Netflix stumbled. In a move presumably
meant to encourage people to move towards the more advanced and
cost-effective downloading service, Reed Hastings announced in July of
that year that Netflix customers who received films in the post would
have to pay $16 a month for the service rather than $10 a month. This 60
per cent hike in prices sparked a revolt and Netflix customers began
cancelling their subscriptions immediately.
Just a few weeks after the price increase was announced Netflix lost 800,000 subscribers. The company's share price also dropped, tumbling by 15 percent when the decline in subscriber numbers was revealed.
An announcement that the company was going to split its video-by-post
operation from its downloading service was quickly reversed. The battle
of the online DVD rental companies is not yet over, and Netflix could
indeed prove the victor. The companies are going head-to-head in Europe
after Netflix launched in the UK market.

However, these kinds of stories, in which smart business ideas are
adopted by imitators, are played out in all sorts of markets. Imitation
is also a lot older than the Internet sector. It happens in airlines
(where Ryanair apes the budget airline model pioneered by Southwest
Airlines), banking (Metro Bank in the UK is a direct copy of Commerce
Bank in the United States) and retail (in which the UK's Asda openly
borrowed from the stack 'em high, sell 'em cheap model perfected by
Walmart in the United States during the 1990s). Some of these copycat
businesses are made to create a global challenger brand, others with the
blessing (and even the financial backing) of the original business
founders.
The fact that there are very few truly original business ideas, however, does not seem to be a problem.